tv Your Business MSNBC January 18, 2014 2:30am-3:01am PST
how do you divide up equity when your small business takes off? the owners of this soap company go 50/50. and these entrepreneurs think out of the box by putting everything you need to remodel a bathroom in one. that's all coming up next on "your business." >> small businesses are revitalizing the economy, and american express open is here to help. that's why we are proud to present "your business" on
msnbc. hi there, everyone. i'm j.j. ramberg, and welcome to "your business." today i want to start out the show by dealing with a tricky topic, equity. how do you divide it up amongst owners? when should you give it to your employees, and how much should you give away? to kick off the conversation, we turn to a young, fast-growing company who counts whole foods, vitamin shop and hundreds of small retailers among its clients. in the spirit of learning a thing or two about distributing equity, the company's owners gave us an honest assessment of what they did right and what they could have done better. ♪ >> equity is so much more than a salary. it is the most sacred thing in a company.
>> reporter: entrepreneur david simnick understands the power of equity. >> it is ownership. >> reporter: dan dahl who co-owns with david agrees. >> when there's no physical currency given, there's no other way to value someone's time and effort. that's the only currency that you have. >> reporter: but how to value a company and how to distribute equity are tough decisions with lots of layers. the owners of the alexandria, virginia, based company had mastered making soap, and they had a social mission they were committed to. but when it came to dividing up the company, they've learned as they've grown. admittedly making some mistakes along the way. >> this is serious. it's real. these are real dollars. >> reporter: at the beginning, david and his co-founder, eric, decided to split the company 50/50. they wanted a level playing field for the business. >> i think there's a herd mentality with entrepreneurship that someone needs to be in control. with soapbox, we didn't want it to be easy. >> reporter: soon enough, the
pair needed help. that's where dan enters the story. in lieu of a salary which they couldn't afford to pay, they gave him a stake in the company. >> he was doing a lot of work for us, but we felt the pressure to be protective of our equity. >> reporter: but they decided his work was worth more than just 10%. and that motivating him with ownership was more important than retaining equity themselves. so they gave him 20%. they didn't value the company at the time, which they should have, but looking back, david says the company was new and worth about nothing. >> he saw problems. he went and fixed them. he saw opportunities. he went for them. and i think more importantly, we saw a partner. >> reporter: the team also saw potential in volunteer stephanie appiah. >> there was blogging, rewriting of web content, then there was making social media pages. >> reporter: again, there was no money to pay stephanie, but there was ownership. >> stephanie just came in and started kicking butt at everything. so after a while, we said, well, we did this for dan, so we should do this for stephanie.
>> reporter: not knowing the intricacies of distributing equity, they didn't exactly do it right. once again, they didn't value the company, but they believed it still wasn't worth much. >> equity didn't have a concrete meaning for me. so signing the paper was like oh, i'm officially on the team. >> reporter: and they didn't dilute the current owners proportionally. they each gave up 1 percentage point to stephanie which hurt dan who owned less. >> at the time it felt right, reflecting back, i probably wouldn't have done that. >> reporter: while david and eric felt they were doing the right thing, they had their doubts. >> there was this outside force of what everybody else was telling us, protect your equity, protect your equity. but when we were going through the dan decision, stephanie decision, i felt okay giving up my equity because i knew i was getting skills and expertise. >> reporter: as the possibility of taking on investors neared, stephanie aetch ppproached the about a larger share. >> my stake was so little that an outside investor with larger
capital could have easily had had a greater voice. >> reporter: approaching the subject was tough. >> it's always tense to talk about money. you balance company interest versus self-interest. >> reporter: after weeks of negotiation, they gave stephanie 3% more, again, without valuing the company. but this time the owners were diluted proportionally. >> dan contributed slightly less to bring stephanie up to 6%. and i felt like that was a little bit more equitable and fair. >> reporter: soon after, another equity negotiation was on the horizon. the stakes were higher, too. >> when dan was renegotiating, it was really going to be the last arbitrary rebalancing of equity that we expected. i was starting to get a little earn canned because all of a sudden once we gain investment, our portions of the company are actually worth something. >> reporter: dan knew that, too, and believed he was worth more. >> i was acting as if i was a co-founder but wasn't being compensated as if i was. >> reporter: dan's share went up to 23%. he also became president and coo. >> he needed to be absolutely viewed as a leader in a
leadership position. >> reporter: the spirit of the increase was right in line with soapbox's philosophy. >> i would rather be in a company of people who want more of the pie and are willing to work for that. >> reporter: when stephanie decided to leave the company, the owners bought her shares back. at what value? well, again, since they didn't formally value the company, they arbitrarily valued each share, something david cautions other entrepreneurs not to do. the most dramatic equity change was next. zloo it completely came out of left field, and it was devastating. >> reporter: eric announced his exit. >> i knew in my position as a co-founder, with the amount of equity i had, i needed to be all in. and i couldn't commit to that. >> reporter: in a pretty unusual move, he gave his shares back to the company. >> who gives away all of his equity? like the largest piece tied with your co-founder of the company back for free? essentially for free. >> reporter: and while david could have become the majority owner, he didn't. he shared it with dan instead.
>> he is basically saying, equity that i should be getting i'm going to give to you, and i'm recognizing our partnership here. >> reporter: the pair agreed to assume the debt eric owed stephanie. and so, in essence, they bought the shares, contrary to what some people advised them, soapbox returned to a 50/50 split. >> their suggestion was make sure that being an equal partner doesn't stall you in making these decisions. >> reporter: david says he's learned a lot about the complications of dividing equity. >> there are a million theories out there. >> reporter: he's more aware of the need to determine evaluation, of creating vesting schedules and how equity can trigger tax events. all of this is about the nitty gritty of how to do things. but when it comes to the spirit of what they did, david believes soapbox did it just right. >> when you start out, you don't know what you're doing. we started out at 50/50. but if i were to do it all over again, i'd do the same exact thing. >> it's not easy. it's definitely going to lead to much greater success.
>> as we just saw, dividing up equity is complicated. there are legal issues, taxish you autos, there are emotional issues. so we brought in an sbert to help sort it all out. brad schwartz is founding partner of strategic law partners. he is also an adviser to the company that i founded. brad, it's great to talk to you. >> good morning, j.j. >> okay. so i want to just concentrate on founders' equity, the first people. in a different segment we'll talk about giving equity to your employees. how do you decide? these guys did it 50/50 when they started. how do you decide how much equity each founder should get? >> you know, there's not a correct way of doing it. and i don't think they went about it in a bad way. what they kind of did was struggle with it, adjust it, and get to a place that they felt right. and while they ignored some of the technicalities of it and some of the tax issues, i think
they wound up in an okay place. and the 50/50 partnership that they have now, while it can lead to problems with deadlock and who's in control, is really a temporary situation because they'll bring in other people. they'll bring in investors, and that will ultimately change. >> okay, but let's take the example, i'm starting a company with my friend. i think we're both going to be in it till the end, but actually, it turns out she's not working as hard as i am. and so now i don't think it's fair that it's 50/50. >> leaves or adjusts their role in the company, it was initially going to be full time. they're going to pull back. and that, i think, is very, very important to address up front with forfeiture provisions, vesting schedules and the like. so that if the initial founders are not working or working at the level that was originally expected, that they would forfeit some of their shares or adjust some of their shares. >> so that's something you talk about up front. so let's just say we have a five-year vesting or forfeiture schedule. i'm getting 50%.
but if i leave after one year, then i give back 40% of that. >> yeah. that's right. and eric was very reasonable in how he went about approaching things. but not everybody is. and it's very important for founders to address that kind of situation where someone is putting in less time or just completely leaves to have the contractual right to adjust their equity and take back some of the invested equity. >> i started this with my partner, she leaves after one year and she still owns 50% of the company. that's not fair. >> it's a terrible situation and one we've seen a lot. >> got it. they adjusted things so many times, and they never valued the company. so they kind of arbitrarily valued the shares stephanie had when she left and paid her out for them. at what point do you have to value the company when you're giving away equity? >> you have to do it every time you give away equity to some extent because the general rule is when equity is granted to
someone who's providing services to the company, it's taxable to them. and the only way to determine what that tax is is to value the company. i don't believe in these early stages where money is scarce that you have to go through some formal valuation and spend a lot of money and determining it, but you do need to do some work and use some common sense in approaching what a reasonable value is very early in your life. >> well, brad, great to see you. thanks a lot for helping us parse through this. >> thank you, j.j. cash is king. we say it all the time here on the show. but what happens when you're a little short on it? here now are five strategies for surviving a cash flow slump courtesy of smallbiztrends.com. one, provide annual discounts. if you charge customers monthly, try offering a one-month discount when they pay a year in advance. two, eliminate unnecessary expenses.
comb through bank statements to identify any recurring expenses that don't drive value. three, reengage customers. your clients may have stopped buying not because they weren't happy with your company but because they forgot you exist. reach out to them with an engaging marketing level and compelling offers. four, consolidate vendors. bundle your supply and service needs through a single vendor whenever possible. and five, include side products. consider occasionally picking up extra jobs. these small amounts of additional revenue can make a big difference. having the ability to see new, better ways of doing things is the hallmark of a true entrepreneur. when you hear the word "disrupter," you may think it's all about tech companies, but it's not. it's happening in every industry. these two californians shook up the world of bathroom renovations with an all-in-one approach that's made things easier for everyone. ♪
>> about three years ago, i undertook a fairly massive remodeling project. >> i had been through the terror and frustration of doing a couple of bathrooms. >> we had german faucets, an american bathtub, italian tile, and here we are sitting there trying to figure out how to put all these parts and pieces together that were not standardized or thought through in any way. >> i was walking down the street literally with a sink with my wife trying to go to three different stores to match it up with the tile she wanted. >> i said, there has to be a more efficient way to put a bathroom together than this. >> there had to be a better way than that. >> reporter: those words, there had to be a better way, launched a new business for these two california-based entrepreneurs. john crowley, a construction systems engineer, and bill huncher, a former wall street banker, are founders of bath simple. a bathroom remodeling business just outside san francisco. as john and bill saw it, the
problem wasn't with the available products out there. the problem was the inefficient process for gathering those products and getting them to consumers. >> the homeowner typically has to travel to many different locations. they go to the lighting store. they go to the tile store. they go to the plumbing supply store. they go to the building materials store to pick out all these parts and pieces which they never get to see all in one place. >> reporter: so how did these two industry outsiders enter the seemingly saturated market of a complex, well-established industry like bathroom remodeling? >> no one has ever approached it from a systems perspective. sometimes it takes someone from outside the industry to reinvent the industry. >> reporter: as outsiders, they asked themselves how they could streamline a process where most of the suppliers and manufacturers don't know each other and almost never communicate. >> no one delivers your bathroom in a box. in the most simplest terms, that's what we do. >> reporter: that's how they hit on the bath in a box concept.
they treated the whole bathroom as a single product rather than a collection of various widgets. by bundling everything together, they streamlined the supply chain from the design sketch to a finished bathroom. >> the idea behind the bath in the box is to be able to think through, in advance, all of the parts and pieces that go into that bathroom ecosystem. >> that's nice. it's all in there? >> vanity, cabinet, tub, all the valves. >> it's a box with my whole bathroom in it. >> reporter: that's homeowner kelly martin of california. she's renovating her bathroom, and everything her contractor needs for the job from the new bathtub and the toilet right down to the tiniest nails and screws are all inside that box. for building contractor chris avant, owner of the bay area canyon construction, that means nothing is missing, and therefore, no lost time and no expensive delays. >> it definitely results in a
savings in the cost, time is money in contracting. >> reporter: john and bill say that big manufacturers are starting to take notice of this new supply chain approach. they see it as an alternative distribution channel to the big-box stores which control much of the industry. >> the manufacturers see bath simple as a way to open up a whole new channel for how they sell their product. they're stuck in the home depot/lowe's channel which is a big channel, but it's a low-margin, you know -- it's dangerous to have one big customer. we sell to the contractors out there, and they get it very quickly. >> skurps, too, are taking notice. the online software makes the selection process faster and easier than the traditional chore of running from store to store. >> i have three middle school kids, and i just don't have the time. so this whole idea intrigued me with bath simple, so that's how i got started with that. >> from the manufacturers to the
contractors to the consumer to the retail chains, they see this as a new way of doing something that's been done for a long time the old way. we've got much more information and advice to kick start your small business including what you can do if you are in a cash flow slump. plus, our panel of experts on taking a local business global on the internet and finding qualified board members. and today's elevator picture will shed some light on his very cool-looking solar-powered lantern. >> i'm very excited about my product. i've been working on it for the last year and a half, and i hope that j.j. and the panelists are equally excited with what we have going on. if i can impart one lesson to a new business owner, it would be
one thing i've learned is my philosophy is real simple american express open forum is an on-line community, that helps our members connect and share ideas to make smart business decisions. if you mess up, fess up. be your partners best partner. we built it for our members, but it's open for everyone. there's not one way to do something. no details too small. american express open forum. this is what membership is. this is what membership does. money doesn't wake you up. the passion for your business is what wakes you up. the consumer is looking to see if you are passionate about speaking about what you're trying to sell them, what you're trying to get them to buy. and so if you're not passionate about it, how can your workers be passionate about it? how can the customer and the consumer be passionate about coming in to spend their hard-earned money to support your business?
let's catch up with what's hot in the world of entrepreneurship with three things you need to know about small business this week. don't dismiss facebook as a vital tool just yet. a new pew research center study shows the social network is still the most dominant platform for small businesses to reach customers. 71% of adults used it in 2013, up 4% from the previous year. the american bankruptcy institute reports business bankruptcy filings were down 24% last year. that's the lowest level since 2006. and entrepreneur magazine is out with its top franchises for 2014. coming in at number one, anytime fitness which now has about 2,500 clubs around the nation. hampton hotels was number two. and number three, subway, which passed the 40,000-store mark last year. it's time now to answer some of your business questions. let's get our board of directors in here to help.
norm brodsky is an inc. magazine columnist. and david kiter is a successful serial entrepreneur in his own right, the co-founder of bionic and enterprise accelerator platform. thanks for being here. great to see you guys. a lot of collective businesses here under all of our belts. let's get to the questions. the first one is about how to grow your business from local to global. >> how would i go about attracting individuals with expertise in developing my business from a local business to internet business which i have, receiving orders all over the world, but as reduced likely in sales? >> got it. okay, so he has the basis. he has an internet business, but it has declined some. how does he boost that up? >> well, the first thing i think about is that the internet is just a channel, right? we have a lot of ways that people buy things from us. analog, they walk into our stores, word of mouth, those things. but the internet is an important
marketing channel. related to his decline in sales, there's -- you almost treat it like an experiment. there's an important discovery to find out why, right? both in the math of that, but how actually people actually buy through that channel from a data perspective. there are a lot of companies on up there from hub spot who actually deal with these type of channels to channel adviser. there are plenty of platforms out there in the marketplace that could at least get him from why has my sales declined, actually building and institutionalizing that capability. >> also looking at the analytics, is it because less people are coming to your site? because they're dropping off your site? >> yeah. i think people overweight the value of the internet relative to their business this they think it's a panacea of growth. it's not a simple marketplace. you don't flip a light switch and sales come through. >> and he talked about how does he attract someone who could do this. >> exactly. that was the first part of his question. how do you attract somebody? and the attraction and recruitment process really starts with the culture of the company. and he has to build that culture
so people really want to work there. you know, maoney's important bu it's not the most important thing. people want to go to work for you because they like the culture and the surroundings. so i think he has to do a combination of both, attracting the right people and then as david said, going to those right channels. >> okay. and then moving on to the next question. this is one from andy. and he asks, "where and how can i find qualified board members who are willing to spend their time helping a start-up grow?" norm, you do so much mentoring. >> yeah. i was going to say, it's really hard to find an advisory board. and people who are willing to take the time and sit in meetings that could last for hours. and so therefore what most start-ups and most people in the beginning, they're mixing up what they need with what they think they need. and board of advisers is not what they need. they need mentors. and they're a lot easier to find. you'd be surprised. most successful businesspeople are willing to mentor and help you out.
but yet, they're not willing to sit on a board. >> and how do you even get a mentor, how do you get someone to take enough interest in you and your company that they want to put out any effort? >> there's two parts. one is you need to ask. i think you always get what you deserve. one of my favorite business flaws comes from bloomberg which is ask for the check and shut up, right? go to the people that really can help you and move your life forward and ask. and you know, it would be remarkable what the outcome could be. the second thing about mentorship, and i agree with norm on this, is that it is important that people are invested in you and your life. you can shape the commitment, the time and energy, but you should also be very constructive with your time. being prepared for that time with them and the outcome is very critical. >> okay. david and norm, thank you guys so much. in our 7 1/2 years on the air, we have heard dozens of elevator pitches. our intent is to help you learn what works and what doesn't work when pitching your business. this year to help in that effort, we have a new grading system called gps.
it stands for growth, passion and sense. do you have a strategy for growth? were you passionate when you gave the pitch? do people have a sense of what your company does? we will grade our pitchers on all three of these points, so let's test it out as today's pitcher shows us his environmentally friendly solar-powered lantern. >> good morning #. >> morning. >> my name is jacques philippe, i'm ceo and co-founder of empowered. my first product is the lantern solar-powered light. her sibling, the lucy, just came out of ces yesterday. and the interest has been tremendous. let me tell you. so lucy, for example, has been distributed to more than 50 countries. domestically, we've shipped lucy to more than 100 retailers in our first year alone, 200,000 product. we initially started the concept in order to meet the demand of people living off the grid, on
the grid but can't afford it or off the grid, would have access to electricity. they mostly live in africa, southeast asia and the caribbean. over 3 million people. as you can imagine, the domestic market is huge skl. we've done very well in japan and the u.s. and investors are really key to get involved. we're in the midst of rounding out our second capital raise. we've got commitments for $2.1 million, and we're looking to get another $1 million to $2 million in this round, and we'd love to get you interested as well as all of the audience. thank you. >> that is cool. can i see this for a second? >> thank you. >> do you guys want to see one also? okay. nice job, i think, but let's grade you from the panel. okay, daivid, i'm going to star with you. "g "did he show a strategy for growth? >> yeah, people want to invest in it. there's a lot of great signals which positive. >> number, though, one to ten. >> i'd say probably an eight. >> what about you, norm? >> that's interesting.
i think there is enough room for growth but i didn't get enough information from that so that was lacking in his pitch. it's a good pitch, but that was lacking. i'd have to give it about a 6 1/2. >> and a half. our first one and you're giving halves. "p," passionate. form. >> yeah, i think he was very passion that the. i think he believed in the product. so that came across really, really great. and for that i'd give him a 9. >> how about you, david? >> i'm in a similar camp. i love the product in both the conversation that it has a purpose. it's good for social good but also has a utility that can be commercialized in a broad sense. there's a lot of good things about the purpose and the passion behind the story. >> so? >> i'd say probably a 9 as well. >> a 9. and then finally sense. it's easier when you have a product, right? a product like this. do you have a sense of what the company does, david? >> i do, obviously, because we can hold it. i think the big challenge for this long term is you've got to have inventory, skus" and diversification. you have to create something
that's a painkiller for people. how do you go from novelty which has purpose to actually have painkiller in people's lives. that's how people consider almost from a marketing position statement. a lot of big challenges ahead but really strong early traction for a 1-year-old company with investors and revenue. >> so your sense? >> i'd say probably a 7. >> norm. >> well, i think i got from this that there's a need for this product. you know, not only a social need but outdoorspeople. when i was a little younger, i was an outdoor person. and we could use something like this instead of a lantern. so i really think that for the sense of the product, i'd give it about a 9 also. >> a 9. all right. so if we tally it all up, david, 24 out of 30. and norm, 24 1/2 out of 30. all right. well, very good job. very impressive product, i think. >> thank you. >> congratulations and congratulations on what's going on this week, too, for you. >> thank you very much. i very much appreciate the opportunity to be here with you. and i'd love to answer any
questions you have at any point. >> and get your money. >> and get you to invest in it. >> great job. >> thanks so much, thanks, guys. if any of you out there have a product or a service and you want feedback from our elevator pitch panel on your chances of getting interested investors, all you have to do is send us an e-mail. the address is email@example.com. in that e-mail please include a short summary of what your company does, how much money you're trying to raise and what you intend to do with that money. you never know. somebody out there watching the show may be interested in helping you. need a way to stay on top of your books but don't have the budget for a program to help you with it? check out our website of the week. lessaccounting.com is a free accounting platform that will help you know exactly what money's going in and what money's going out of your business. see all of your company credit card activity in one place, send invoices and keep track of which ones have been paid or still need some follow-up. the site can also generate reports for you so that you can make informed decisions.
thanks, everyone, so much for taking the time to join me today. if you missed anything or just want to see it again, go to our website. it's openforum.com/yourbusiness. you'll find all of today's segments plus some web exclusive pieces to help your business grow. next week, how you brand your company can make the difference between standing out in a crowded marketplace or falling into oblivion. find out what these entrepreneurs did to grow their business and their brand. till then, i'm j.j. ramberg. and remember, we make your business our business. if i can impart one lesson to a new business owner, it would be one thing i've learned is my philosophy is real simple american express open forum is an on-line community, that helps our members connect and share ideas to make smart business decisions. if you mess up, fess up.
be your partners best partner. we built it for our members, but it's open for everyone. there's not one way to do something. no details too small. american express open forum. this is what membership is. this is what membership does. late in the day on a friday, for most people who work monday to friday, late in the day on a friday is the time when you least want to be at work. but if you work in this business, if you work in the news business, late in the day on a friday is the happ, happ, happiest time of the week. because late in the day on a friday is when huge and unexpected news tends to drop out of the sky. and today's late in the day on friday, huge and unexpected news that fell out of the sky, was this. office of the governor, p.o. box 001, trenton, new jersey, please find attached hereto, a subpoena